Economic Complexity and the Engine of Psychology
Context: The essay considers economics as a psychological phenomenon with the characteristics of a complex dynamic system. It is an initial and somewhat playful exploration, not a mathematical paper on systems theory. The original context was a discussion group background paper which evolved away from its origins. The starting proposal adopted (for argument’s sake) was that “the most economically successful societies have always depended upon a high level of government collusion with commerce and industry, if not control. This argument is a way of saying that the “invisible hand” of the market is not enough to maintain an efficient market, at least beyond village level. There has to be an independent umpire, or forced control (dictator, mafia … )”. It became clear that the government-industry collusion issue was really a surface gloss on a much more complicated reality.
1. The writer of this essay, although not quite economically or politically illiterate, is neither an economist nor a politician. Practitioners of those dismal professions will therefore fall about laughing at what follows. On the other hand, the purpose here is to provide food for thought and debate, so having a yokel stumble into the palace may offer a little distraction from the cemented-in assumptions and clichés of professional courtiers.
2. The starting concept used here of what economics is about needs prior warning, since it violates the usual conventions from Economics 101 textbooks which millions have imbibed uncritically (see May, Thor 2011 for some more impolite remarks about this mindset). I take economics to be the study of certain psychological configurations, not per se an analysis of the availability and rational allocation of resources etc. The argument behind this psychologizing of economics, crudely put, is that in the end resources (material, capital, labour) may not matter so much. These things can always be stolen, borrowed or bought. Take the right group of Koreans, Japanese, Chinese, Englishmen, Germans … and put them on a desert island. In short order you will find the place turning into another Singapore. On the other hand, billions of dollars poured into so-called foreign aid has usually made a desperately pathetic contribution to the real economic futures of recipient societies (though often enriched source country contractors).
3. Political literature is awash with ideological debates about the virtues of capitalism and socialism, each bearing their own mythologies about the characteristics of government and the market economy. These concepts have each accumulated more meanings than a chameleon’s camouflage, while their descriptions veer (often incoherently) between claims of economic rationality, moral superiority and historical necessity. In fact, an objective look at real nation states and the social spaces within them, makes it pretty clear that no sustainable community has ever really been “socialist” or “capitalist”.
4. The surviving human story has always been one of compromise, in the economic dimension or any other. Nowadays, whether the topic is Russia or China or Vietnam or Uruguay or Venezuela or Sweden or Australia or Nigeria or the United States of America, or a sprawling refugee camp of stateless persons (of whom there are tens of millions), we all live in “mixed economies”. The mix varies, and it varies on many dimensions. There is always a level of government intervention for various reasons, effective or ineffective, and always attempts by outside forces to influence government. There is always an “informal economy”, which in some cases dwarfs the official economy. There are always individuals, small businesses and corporations (some transnational) which interact in various ways with governments, national and local.
5. The endless ideological tirades about “socialism”, “communism”, “capitalism” and lots of other –isms are therefore mostly political white noise, diverting attention from real problems which need to be solved in real communities in the most practicable available ways. Sometimes those ways will involve the engagement of some level of government. Sometimes they won’t. I personally dislike ideologies strongly held, and distrust decisions that are driven by them. If there is a moral preference evident in this paper it is probably that wherever action occurs, in government or business or individually, it should be as competent and humane as possible.
6. The account to follow tries to remain free from the more traditional categories of politics and economics, or at least to use them when needed with a very light touch. Instead I will introduce some new categories as a kind of thought experiment. These categories are play dough. Readers should feel relaxed about reshaping them, prodding, kneading and even pinching them apart. It is OK to be a bit naïve. I’m naïve. It helps thinking, as in going where even fools fear to tread, since we aren’t responsible for anything in a mere essay.
7. A society is a life-long collection of people. One description of an economy is how that collection of people interact together firstly to provide subsistence needs, secondly to provide and distribute perceived needs, and thirdly how they manage any surplus. Let us call this concept Economy1. An entirely different description of an economy is how abstract entities such as corporations, industries and governments interact to generate the objectives desired by their controlling elites. Let us call this concept Economy2. Economy1 and Economy2 obviously evolve over time in emergent relationships, but the metrics of productivity in each only partly overlap. An often fluid set of relationships between Economy1 and Economy2, mediated by individuals, associations and institutions could be called Economy3.
8. Economy3 is essentially a service economy from the perspective of individuals in Economy1, and a defensive economy from perspective of the much smaller number of individuals who closely identify with Economy2. A simple example of this would be Economy1 people viewing unemployment benefits as a subsistence safety net (or in extreme cases, a long term source of income), while Economy2 types might view the benefits as insurance against any social unrest which could threaten their advantage. The marketing of unemployment benefits would of course be expressed in terms of broad social justice (i.e. an Economy1 notion of a productive outcome), not the insecurity of elites (an Economy2 notion of a cost to be minimized). However, the actual policy decisions and the necessary mobilization of capital would occur by Economy3 professionals acting as agents for interests in Economy2.
9. The dominant human relationships within the elite Economy2 in almost every national and trans-national jurisdiction are driven by patronage systems which co-opt expertise as needed. Historically, this has always been the case, regardless of revolutions, ideologies, laws, or official systems of government, or declared systems of management in companies. The actual mechanics of patronage are often determined by local cultures, and are sometimes so familiar that they are assumed to be ethically desirable. Monarchs, bishops, presidents, prime ministers, mayors, directors and dictators have always felt it was their proper role to dispense favours, status and sinecures in exchange for unquestioning loyalty.
10. However in the current era, dispassionate professional and technocratic decision making is usually the public cloak for whatever ruling elites wish to arrange. The economic discourse of public media is a significant part of this cloak. Terms like “GNP” and “productivity” come trippingly off the tongues of people who have no serious understanding of what they mean, but who will vote under the delusion that they do. The ideal outcome is to persuade all the members of a society’s several economies that each decision is the best possible compromise.
11. Often enough professional and technically driven solutions are the best possible outcomes for the largest number of participants in Economies 1, 2 and 3. However, this is by no means always the case. Where there is a serious contest of interests, Economy2 participants will overwhelmingly prevail in substance while media machines are deployed to camouflage that substance in the wider public domain (Economy1). Nevertheless, where the human relationships within Economy2 are excessively hierarchical and irrational, the human weaknesses of peak power holders may be a threat not only to Economy1 and Economy3 players, but also undermine the integrity of Economy2. At an extreme, instability in Economy2 can precipitate chaotic change.
12. Thinking very broadly, the participants in Economy1 are concerned with the personal human life cycle of childhood, growing to maturity, finding a partner, making a family, securing an income, following hobbies and spectator sport, accumulating some personal stability in the form of a house and modest possessions etc. That is, attention is focused at a very local level, and allows for only the briefest interest in the wider social structure, national political and economic issues, or patterns of historical development. Knowledge of these things tends to be sketchy, often linked to generalization and prejudice, and is prone to manipulation by more sophisticated players through mass media. However, since Economy1 participants make up the bulk of any population, big numbers of them moving in one direction (e.g. as in an election) will have a large effect, regardless of whether the movement is wise or foolish. The implication here is not that Economy1 participants are stupid, but that their priorities (i.e. their notions of personal productivity and worth) are often at variance with the participants in Economy2 (i.e. ruling elites). This is a question of individual psychology, unrelated to and mostly unchanged by public ideologies of the day such as Capitalism, Socialism, or name-your-religion-ism. In other words, the argument I am making is that this Economy1 is not defined by any traditional definition of economics, such as “a system for the allocation of resources”. That sort of thing is secondary to the more immutable principles of psychological organization.
13. The participants in Economy3 are boundary players. They mediate the relationship between Economy1 and Economy2 by offering all kinds of functional services, which objectively they may perform well or poorly. It is their service role which determines that this group is most effective when they can operate in a meritocratic environment. Of course, in many jurisdictions the meritocratic paradigm is not possible for them, usually because power holders in Economy2 set unfair conditions on their engagement or co-option.
14. For example, even the humblest of Economy3 participants in some countries may be required to purchase employment. I understand that the price to become a policeman in Russia now stands at around US$50,000, a bribe which must be recovered of course by violations of justice at the expense of the members of Economy1. When I taught in central China, my student nurses upon graduating would have to borrow from relatives up to RMB 115,000 just to secure base level employment in a hospital for a monthly salary of RMB2,500. Analogous burdens might be large student debts accumulated by American students for tertiary qualification (see Collins, 2013). Distortions of this kind set up their own long term localized economic cycles with personal priorities which no passing political “reforms” can easily break.
15. Generally Economy3 participants have some kind of professional training, so that as a constituency education is very important to them. Since these people tend to be aspirational, they value status and the visible lifestyle markers which distinguish that status. Income is an essential enabler in this. Therefore they are vulnerable to manipulation by Economy2 power holders, either directly through controlling access to status and privilege, or indirectly through providing income opportunities. A significant number of Economy3 participants do have a sophisticated knowledge of national level social and economic behaviour, so this gives them a certain power as agents to control (or even oppress) Economy1 participants. When the interests of Economy3 participants are severely at risk, they also have the knowledge and sometimes the means to displace Economy2 power players.
16. In the last 30 years or so, students of Complex Systems Theory have come to realize that almost all dynamic systems in nature scale in ways which can be quite unpredictable in their details of change while retaining a kind of order within degrees of freedom. Factors which dispose such systems to order have been called strange-attractors. In the economic sphere, the conscious plans of human beings amount to a variety of strange-attractors, yet millions of those beings planning to their own ends generate economic outcomes, both as individuals and as constituents of a single population, which can oscillate with text book predictability, or sometimes swing chaotically out of control.
17. Long ago I was assigned to teach economics to a high school class using a text book which described Paradise Island. That was nice. On Paradise Island we traded in fish and bananas, then invented money for convenience. Thereafter transactions followed idealized notions of supply and demand, executed by utterly rational persons acting in their own interests. Over the years I have lost track on the number of newspaper headlines which talked to us as inhabitants of Paradise Island. Elections have been won and lost on Paradise Island.
18. Economic management (as I understand it) is largely the domain of co-opted Economy2 professionals, who may see their dilemma as how to generate the best illusion of Paradise Island for Economy1 constituents, the most stable oscillation of complex economic systems for Economy3 service constituents, and the most dynamic, yet lowest risk growth for Economy2 constituents. We might wish that those priorities were otherwise, but this configuration seems to be the way of the world.
19. In societies with small homogeneous populations, the ruling elites both within government and formally out of it in industry, property holdings etc are likely to be well known to each other. They will have gone to the same schools, probably share similar values, and may even come from the same families. Children of these players who grow up to become professionals will slip seamlessly into supporting roles through their network of social connections. Whatever laws are passed to regulate economic behavior within this Economy2 circle, it is inconceivable that the implementation of those laws and practices will not involve close collusion between governmental administration and commercial practice. If deliberately managed (though perhaps concealed) such collusion can yield great synergy. The government-chaebol paradigm in South Korea is a clear example of this kind of synergy. Where elite collusion between government and industry is sourced purely in nepotism to the exclusion of competence, then the economic cost will be stagnation or destruction. Any number of third world states fit that description.
20. As societies become very large with tens of millions of people, no ruling elite can maintain absolute contact and loyalty from possible recruits to its circle. What emerges in fact is a kind of fractal structure. Fractals, readers may recall, are systems which retain self-similarity whatever the scale. Nature is full of fractal structures like this, from tree leaves to the veins & arteries in human bodies. Each iteration is slightly different, within degrees of freedom, yet mathematically the pattern (which might, for example, be a set of genetic instructions for cell replication) can be a fairly simple self-replicating non-linear equation. Note however that the equation does not have to be simple. For purposes of the discussion here, the relevant feature is that socio-political economic arrangements in large societies have fractal properties of self-similarity. That is, they are iterated at a multitude of levels from local community organizations to the nation state. If this is true, then the patterns of collusion I have described in paragraph 19 will also be replicated on many levels.
21. However, it is also a defining property of complex systems that the whole behaves in ways which exceeds the sum of behaviours of its constituents. (For example a human being is more than the sum the individual behaviours of 100 trillion cells). The behaviour of a whole national economy will embed the collusion of industry & commerce with governmental institutions at many “fractal” levels. It will also embed countless other interactions, whether conscious collusions or not.
22. Some subsidiary interactions which are successfully contained within acceptable limits at a lower level may precipitate unpredictable outcomes at a higher system level. We often see this effect for example in local transgressions of the law, normally having a contained effect on some individual or company, but when appealed to successively higher courts creating a national precedent affecting the whole nation in unexpected ways.
23. Even the fractal characteristics of socio-political economic arrangements are not sufficient to account for overall outcomes in whole national economies. In addition, as a thought experiment here I have also suggested three macro concepts of Economies 1, 2 & 3, driven by overlapping but sometimes competing forces. In other words, there is not a single fractal equation to describe what is going on here, but a whole family of fractal equations. To describe an over-arching single economy is therefore dauntingly complex, and emergent effects will often be impossible to predict. The detailed arguments to support that proposition would be very involved, and are beyond the scope of this essay. Similarly, my descriptions of Economies 1, 2 & 3 themselves are obviously caricatures of what are likely to be far more complex actual patterns, but they suffice for illustration.
24. The critical behaviour of fractal systems occurs wherever there is a boundary condition. A boundary condition sets the limits of self-similarity, or in terms of formal complexity theory, defines an “attractor”. If we are thinking in terms of dynamic social, political and economic systems, boundary conditions will be invoked in setting the relationship between one fractal scale and another, as well as between one fractal set and another fractal set (which is the nature of pluralistic societies).
25. For example, to take an imaginary single fractal set, the relationship between multiple municipal councils and a single state government (both structurally similar entities) will fluctuate within “acceptable” limits, but at a certain point of provocation will become unstable, unpredictable, even chaotic.
26. A different kind of equation is generated when two dissimilar but overlapping social fractal sets interact. For example, one imaginary fractal set might be the relationship between media organizations and the fractal set of political organizations in a country, from local community groups, through local government, state government and national government. The boundary effects might be quite different at each level. Some Australian media organizations control both community newspapers and media with state and national reach. The media-governmental collusion pattern might, for example be beneficial (or not) at local level, yet severely distort political outcomes with unpredictable consequences at national level.
27. This essay started with a discussion proposal: The most economically successful societies have always depended upon a high level of government collusion with commerce and industry, if not control. This argument is a way of saying that the “invisible hand” of the market is not enough to maintain an efficient market, at least beyond village level. There has to be an independent umpire, or forced control (dictator, mafia … ). On the face of it the preceding arguments seem to have scarcely addressed this discussion proposal. For example, I have made no distinction between government interference in industry and the interference by industry in government (though there are libraries of argument about both). Yet the substance of the arguments I have given is that the discussion proposal could never be in serious doubt, whatever the political rhetoric of the day. It has not so much been a matter of what is desirable (except for political spin) as where the money and the power lies, and how that advantage has been exercised. The owners of money and power have always effectively owned both the government and what we quaintly call the economy. The actual inheritors of the money and the power might change over time, or even with revolution, but the real configurations of economies do not change with that. They are not really founded on the efficient allocation of resources (this allocation merely reflects underlying symptoms), but in much less malleable dimensions of human psychology (hence Economies1, 2 & 3).
28. If I were a minister in the state of Utopia, tasked with making actual decisions about real issues of industry interference in government, or government interference in industry, my choices would not be governed by ideology. They would be based on a clear eyed look at the available talent in each domain and how to make the best uses of it (and that of course is the point of the graphic at the beginning of the essay). The contest for competence IS a major determinant of real outcomes, and I have written about it elsewhere (reference in the reading list).
29. Back on earth, something we may be able to influence is how well the real configurations of economies are understood, and by whom. With the broadening of such understanding beyond a small controlling elite comes the possibility (and it is only a possibility, not desired by many with existing advantage) of optimizing benefits to a wider population base. However even with the best understanding available, the effects of change in complex systems is ultimately unpredictable. The road to hell is paved with good intentions.
Extra Reading (informal, not strictly academic. Note that the inclusion of these readings in no way implies that I agree or disagree with their arguments. The many Wikipedia links offer mixed value, but they form a good starting point for entry into particular concepts).
Wikipedia (2013) Complexity Theory. online @
Wikipedia (2013) Complexity Economics. online @
Wikipedia (2013). Mixed Economy. online @ http://en.wikipedia.org/wiki/Mixed_economy
Wikipedia(2013). Government Interventionism. online @
Wikipedia (2013) Statism. online @ http://en.wikipedia.org/wiki/Statism
Wikipedia (2013) American School. online @ http://en.wikipedia.org/wiki/American_School_%28economics%29
Wikipedia (2013) Corporatist economy. online @ http://en.wikipedia.org/wiki/Corporatism
Wikipedia (2013) Dirigisme. online @ http://en.wikipedia.org/wiki/Dirigisme
Wikipedia (2013) Distributism. online @ http://en.wikipedia.org/wiki/Distributism
Wikipedia (2013) Nordic model. online @ http://en.wikipedia.org/wiki/Nordic_model
Wikipedia (2013) Rhine capitalism. online @ http://en.wikipedia.org/wiki/Rhine_capitalism
Wikipedia (2013) Social corporatism. online @ http://en.wikipedia.org/wiki/Social_corporatism
Wikipedia (2013) Social market economy. online @ http://en.wikipedia.org/wiki/Social_market_economy
Wikipedia (2013) Socialist market economy. online @ http://en.wikipedia.org/wiki/Socialist_market_economy
Wikipedia (2013) Welfare capitalism. online @ http://en.wikipedia.org/wiki/Welfare_capitalism
Wikipedia (2013) Capitalism. online @ https://en.wikipedia.org/wiki/Capitalism
Wikipedia (2013) Socialism. online @ https://en.wikipedia.org/wiki/Socialism
Wikipedia (2013) Communism. online @ https://en.wikipedia.org/wiki/Communism
Wikipedia (2013) Economics. online @ https://en.wikipedia.org/wiki/Economics
Wikipedia (2013) Household Income (international comparison). online @ http://en.wikipedia.org/wiki/Household_income
Atherton, David (March 2013) No Contest: Capitalism vs Socialism. Thecommentator.com online @ http://www.thecommentator.com/article/2970/no_contest_capitalism_vs_socialism
Battaglia, Gabriele (7 August, 2013) Beijing readies for new urbanization. Asia Times, online @ http://www.atimes.com/atimes/China/CHIN-01-070813.html
Collins, Chuck (May 28, 2013) The Wealthy Kids Are Alright. The American Prospect @ http://prospect.org/article/wealthy-kids-are-all-right
Debate.org (2011 ) Debate topic: Capitalism vs Socialism. online @ https://www.debate.org/debates/Capitalism-vs-socialism/1/
Eley, Tom (2008) Socialism vs. the government bailout of capitalism. World Socialist Website, online @ https://www.wsws.org/en/articles/2008/10/soci-o15.html
Gleick, James (1987) Chaos – making a new science. pub. London: William Heinemann Ltd
Halsey, Ashley (March 19, 2013) U.S. Infrastructure gets D+ in annual report. Washington Post, online @ http://articles.washingtonpost.com/2013-03-19/local/37846681_1_civil-engineers-infrastructure-report-card
May, Thor (2011) If a Market Not a Market. online @ http://thormay.net/unwiseideas/marketnotamarket.html
May, Thor (2012) The Contest for Competence. online @ http://thormay.net/unwiseideas/competence.html
Milton, Chris (2012) The Misconceptions of Capitalism vs Socialism | Building a Sustainable Economy. The Ecopreneurist, online @ http://ecopreneurist.com/2012/12/19/the-misconceptions-of-capitalism-vs-socialism/
Mitchell, Melanie (2009) Complexity, A Guided Tour. pub. UK:OUP and also Kindle e-book edition.
Orr, Deborah (June 2, 2012 ) We did socialism and capitalism, and we're still in a mess. But there is hope. The Guardian newspaper, online @ http://www.theguardian.com/commentisfree/2012/jun/01/middle-class-recession-financial-crash
PublicIntelligence.net (May 31, 2013) DHS Says Aging Infrastructure Poses Significant Risk to U.S. . Public Intelligence, online @ http://publicintelligence.net/dhs-national-risk-profile-aging-infrastructure/
Scimia, Emanuele (7 August, 2013) China bets big on new global links. Asia Times, online @ http://www.atimes.com/atimes/China_Business/CBIZ-02-070813.html
Zhang, Lisa (n.d.) This house believes that capitalism is better than socialism. International Debate Education Association. Includes bibliography. online @ http://idebate.org/debatabase/debates/philosophy/house-believes-capitalism-better-socialism
Professional bio: Thor May's PhD dissertation, Language Tangle, dealt with language teaching productivity. Thor has been teaching English to non-native speakers, training teachers and lecturing linguistics, since 1976. This work has taken him to seven countries in Oceania and East Asia, mostly with tertiary students, but with a couple of detours to teach secondary students and young children. He has trained teachers in Australia, Fiji and South Korea. In an earlier life, prior to becoming a teacher, he had a decade of drifting through unskilled jobs in Australia, New Zealand and finally England (after backpacking across Asia in 1972).
Note: "Economies need a high level of government interference (?)" is online at http://thormay.net/unwiseideas/Economic-Complexity-and-the-Engine-of-Psychology.htm and also linked from Discussion Topics at http://discussiontopics.thormay.net/
"Economies need a high level of government interference (?)" © copyrighted to Thor May; all rights reserved 2013